Business World, 25 November 2014


There is a strong likelihood that Philippine authorities would miss even the lower end of its 2014 gross domestic product (GDP) goal of 6.5% to 7.5%. Analysts attribute this to the government’s continued underspending, weak agriculture production, and lackluster industrial output.

With government spending way below the program, especially for public infrastructure, the contribution of public spending to economic growth will, at best, be neutral, and at worst, negative. For the first three quarters of 2014, programmed government spending is P1.73 trillion, and with actual spending of P1.456 trillion, the size of public underspending is P274 billion.

I have asked this many times before, but let me ask it again: is this a case of government incompetence or poor budget planning, or both? No doubt the Aquino III administration has been consistent with its poor performance. From 2011 to the third quarter of 2014, public underspending has been estimated at P594 billion.

Mr. Aquino’s public-private partnership (PPP), after his more than four-and-a-half years in office, has remained in the doldrums. Its first and modest PPP project, the Daang Hari road project, will not be completed until mid-2015, a delay of more than two years.

The first semester growth is 6%. The second semester growth is expected to have weakened due to both external and internal factors, but mostly due to the latter.

As I have discussed above, government underspending continues. Agriculture grew at below its true potential.

I estimate that the economy expanded at 5.9% in the third quarter. If so, it will have to hit 8.1% in the fourth quarter in order to hit 6.5%, the lower end of the government’s official annual GDP goal. But we’ve not seen that kind of growth since the first and second quarters of 2010.

Exports will manage modest growth since the recovery of the world economy remains iffy. Europe is teetering on another recession. The German economy, the undisputed powerhouse of Europe, grew by 0.1% in the third quarter. This prompted Mario Draghi, the European Central Bank president, speaking at a conference in Frankfurt, to strongly signal that he and his colleagues were preparing a new round of powerful monetary stimulus to perk up the slowing Eurozone economy.

China’s economy has deteriorated too, prompting the Chinese central bank, in a surprise move to lift the economy by cutting its benchmark lending rate by 40 basis points. This is China’s first interest rate cut since more than two years ago, a concession to pressures from a slowing economy and increasingly high borrowing costs.

Japan is technically in recession. Its economy contracted further in the third quarter after a severe contraction in the previous quarter.

With Japan, China and the Eurozone economy in trouble, it is difficult to imagine how the mild growth in Philippine exports can be sustained. This leaves the domestic economy as its major source of economic growth.

With a flagging world economy, growth in industrial outputs will be largely driven by domestic demand. Factory outputs will be determined largely by strong or weak consumer demand. The number of existing projects that need to be completed and demand for low- and middle-income housing will determine private construction. The latter, in turn, will depend on strong consumer confidence for the future.

By the way, private construction was historically three-fourths of total construction. This means that even a strong public construction performance would have limited success in making up for weak private construction. Furthermore, one cannot disburse what Congress has not authorized the Executive Department to spend.

Agriculture outputs have been sluggish and cannot be relied upon as a strong source of growth. The volume of farm output rose just 0.33% as of the end of the third quarter, compared to the 1.1% recorded in the same period last year and well below the 3.5-4.5% target set for the entire 2014.

Sustaining a full-year growth rate of 6% in 2014 and 2015 is in the fiscal managers’ court. They have to budget well, and with the help of line department secretaries, spend more in job-generating and economy-enhancing activities.

At this critical juncture of the contemporary economic cycle, the role of monetary authorities in sustaining growth is rather limited. They cannot increase interest rates because that’s a sure formula for slowing economic expansion. Private investment and demand for consumer durables will be squeezed as the cost of borrowing goes up.

Raising interest rates could only attract more “hot money” as interest rate cuts become the norm in Europe, Japan and China and most emerging economies. The inflow of foreign currencies into the country, in turn, will lead to currency appreciation, which could then reduce the purchasing power of families of overseas Filipino workers. With a smaller budget, consumer spending will be depressed.

The policy options become clearer but narrower. The fiscal managers have to budget better while the line department secretaries have to spend faster, especially for public infrastructure. Higher government spending has both positive short-run and long-run effects. Fiscal authorities should definitely do something now.

For monetary authorities, they should ease off the drive to tighten interest rates. They should maintain the accommodative course a bit longer. Doing nothing is their best option.